Question four

M Ltds budgeted profit for its next financial year, when it expects to be operating at 75% of its capacity, is as follows:

K000 K000

Sales 9, 000 units at K32 per unit 288

Less:

Direct material 54

Direct wages 72

Production overhead

Fixed 42

Variable 18

186

Gross profit 102

Less: Non-production cost

Fixed 36

Varying with sales volume 27

63

39

It is estimated that:

1. If the selling price per unit were reduced to K28, the increased demand would utilise 90% of the companys capacity without any additional advertising expenditure;

2. To attract sufficient demand to utilize full capacity would require a 15% reduction in the current selling price and a K5,000 special advertising campaign.

Required

1. Calculate the breakeven point in units based on the original budget

(6 marks)

2. Calculate the profits and breakeven points that would result from each of the 2 alternatives and compare them with the original budget

(13 marks)

3. Make a recommendation based on the information in (a) and (b)

(6 marks)